On a Friday, when the markets had been glued to headlines around tax legislation, and then again Flynn-Russia-Trump news, the Federal Reserve’s view on U.S. gross domestic product (GDP) for the fourth quarter was ratcheted higher. We had already seen several firms and organizations lift 2018 expectations for GDP in the U.S. and for global GDP growth. Now the Federal Reserve Bank of Atlanta’s GDPNow forecast just jumped much higher for the fourth quarter of 2017.
The Atlanta Fed’s GDPNow model forecast, which is a regional model rather than the Federal Open Market Committee (FOMC) model, had been 2.7% for real GDP growth in the fourth quarter just a day earlier. That adjusted level was revised much higher to a 3.5% target on seasonally adjusted GDP growth.
Three issues appear to have caused the higher forecast.
It was shown on Friday that the forecast of real consumer spending growth rose up to 3.1% from 2.6% after the fresh ISM reading on manufacturing. Also seeing an increase was the forecast for real private fixed-investment spending growth, up to 8.4% from a prior 6.7%, based on the strong construction spending data. The forecast of real government spending growth increased from 2.0% to 3.0% after the construction spending data was released.
What matters here is that the stock market and financial markets have been hoping for GDP growth of 3%. This also matters to the Fed itself ahead of the mid-December FOMC meeting, where the markets have pegged a 90% chance of a rate hike as of early Friday morning.
Before thinking that this is only revision, the GDPNow model is given revisions after most major economic announcements. This new forecast is of course higher, but here is how the trending model has been in recent days and weeks:
- 30-Oct Initial nowcast 2.9%
- 1-Nov ISM Manuf., Construction spending 4.5%
- 2-Nov Light vehicle sales 4.3%
- 3-Nov Employment, Foreign trade, ISM Nonmanufacturing 3.3%
- 9-Nov Wholesale trade 3.3%
- 13-Nov Monthly Treasury Statement 3.3%
- 14-Nov PPI 3.3%
- 15-Nov Retail trade, CPI 3.2%
- 16-Nov Ind. Production, Import/Export Prices 3.5%
- 17-Nov Housing starts 3.4%
- 21-Nov Existing-home sales 3.4%
- 22-Nov Advance durable manufacturing 3.4%
- 27-Nov New-home sales/prices/costs 3.5%
- 28-Nov Advance Economic Indicators 3.0%
- 30-Nov GDP, Personal Income & Outlays 2.7%
- 1-Dec ISM Manuf., Construction spending 3.5%
U.S. GDP growth was only 1.2% in the first quarter of 2017, but it was then seen at 3.1% in the second quarter and it has been revised up to 3.3% in the pre-final revision for the third quarter of 2017.